What is the long-term impact of transferring all the risk on a construction project to the contractor?
In April 2016, defects found in 17 schools in Edinburgh resulted in those schools being closed to pupils. Like design and build, construction management and other procurement strategies, the Private Finance Initiative schemes were intended to transfer risk from the public sector to the private sector eg contractors and their funders.
But the construction industry tends to deal with an increase in its liability for the consequences of risk by:
- adopting a tough approach in negotiations (as the Public Accounts Committee found, this resulted in complex and inconsistent contracts which did not necessarily meet the needs of the public sector)
- ignoring uninsurable risks (<yikes>)
- adding more complexity to contracts (in an attempt to ensure no gaps between the T&C and insurance cover)
- increasing prices (where the market allows)
- passing risk down the supply chain (to companies least able to insure or manage that risk) also seen as risk-dumping.
An article in Building in 2014 called this an ‘it will be alright on the night’ attitude. It is based on the principle that commercial considerations outweigh risk-awareness. Instead of a ‘fingers crossed’ approach, one solution for risk is to be more proactive:
If a relatively modest investment is made early on in a project… many costly disputes …could be avoided.
PS The same is true when it comes to letters of intent.